Suppose you work as a CFO in a hospital. The hospital director is considering buying a...
Assume you are considering buying a machine to increase production and sales of a certain product. Which of the following effects should NOT be considered in the capital budgeting analysis? a.) Last year a marketing consulting firm charged you $500,000 to forecast future sales of your product. b.) Increased sales of this product will cause a reduction in sales in another one of your firm's products. c.) The money invested in this machine could alternatively be used to do research...
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1. You are considering buying equity in a firm. If you purchase the equity, in one year you will receive $1.5 million with 40% probability and $1.2 million with 60% probability Currently the yield on one year T-bills is 4%. Suppose that you require a risk premium of 10% to invest in the equity of this firm. In other words, your minimum required return on this investment is 14%. (a) What is the most you would be...
A hospital is considering acquiring an MRI machine as there is a good demand for MRI procedures. They estimate that there would be about 400 MRI Procedures per year. A new machine would cost $2,500,000 and it could be used for five years after which, it could be sold for $400,000. The variable cost per procedure is $300, and average revenue is $1500 per procedure. Instead of buying the machine, the hospital can rent a machine from the equipment manufacturer...
You are considering opening a new plant. The plant will cost S98.1 million upfront and will take one year to build. After that, it is expected to produce profits of $30.9 million at the end of every year of production. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 7.3%. Should you make the investment? Calculate the IRR. Does the IRR rule agree with the NPV rule? Here...
You are the assistant to Ron Michaels, the budget director for Alpine, Inc. It is early in January 2019 and you just met with him to discuss the capital budget for the year. Ron indicated that Alpine’s CFO restricted total investment for the year to $18 million. Hence, you have to determine in which of the three projects in the following table Alpine should invest. Project Investment required IRR A $ 14.50 million 7.50% B 4.50 million 6.70% C...
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As the CFO of a major corporation, you are considering whether to accepta project with after-tax cash flows as indicated below. The beta for the project is 1.4 and the return on the market is expected to be 12%. The current risk free is 4%. What is the NPV of the project? Time After-tax cash flow 0 $-35 million 1-5 $ 12 a. $- 3.1751 b. $- 5.7422 c. $ - 0.0822 d. $11.9211...
You are the CFO of Crane, Inc., a retailer of the exercise machine Slimbody6 and related accessories. Your firm is considering opening up a new store in Los Angeles. The store will have a life of 20 years. It will generate annual sales of 4,900 exercise machines, and the price of each machine is $2,500. The annual sales of accessories will be $600,000, and the operating expenses of running the store, including labor and rent, will amount to 50 percent...
You are the CFO of Carla Vista, Inc., a retailer of the exercise machine Slimbody6 and related accessories. Your firm is considering opening up a new store in Los Angeles. The store will have a life of 20 years. It will generate annual sales of 4,400 exercise machines, and the price of each machine is $2,500. The annual sales of accessories will be $600,000, and the operating expenses of running the store, including labor and rent, will amount to 50...
The Eastern College of Veterinary Medicine Veterinary Teaching Hospital (VTH), a nonprofit tax-exempt organization, is considering leasing a CT unit for their radiology service. The lease term will be $47,784 paid annually for six years. At the end of the lease, the hospital will own the unit. The radiologists would like to charge $375 per scan, and they expect to do 330 scans in the first year and 430 scans in each subsequent year. A maintenance agreement costs $104,000 per...
You are the CFO of Carla Vista, Inc., a retailer of the exercise machine Slimbody6 and related accessories. Your firm is considering opening up a new store in Los Angeles. The store will have a life of 20 years. It will generate annual sales of 4,400 exercise machines, and the price of each machine is $2,500. The annual sales of accessories will be $600,000, and the operating expenses of running the store, including labor and rent, will amount to 50...